<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: AUGUST 9, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number: 0-6054
STAR BUFFET, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-1430786
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
440 LAWNDALE DRIVE,
SALT LAKE CITY, UT 84115
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 463-5500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 2,950,000 shares of the issuer's common stock, par value $.001 per
share, were outstanding as of September 17, 1999.
<PAGE> 2
STAR BUFFET, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of August 9, 1999 (unaudited)
and January 25, 1999.............................................................3
Unaudited Consolidated Condensed Statements of Income for the twelve weeks
ended August 9, 1999 and August 10, 1998.........................................5
Unaudited Consolidated Condensed Statements of Income for the twenty-eight
weeks ended August 9, 1999 and August 10, 1998...................................6
Unaduited Consolidated Condensed Statements of Cash Flows for the twenty-eight
weeks ended August 9, 1999 and August 10, 1998...................................7
Notes to Unaudited Consolidated Condensed Financial Statements.......................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................18
Item 4. Submission of Matters to a Vote of Security Holders.................................19
Item 6. Exhibits and Reports on Form 8-K....................................................20
Signature....................................................................................21
</TABLE>
2
<PAGE> 3
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AUGUST 9, JANUARY 25,
ASSETS 1999 1999
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,000 $ 121,000
Current portion of notes and other receivables 676,000 2,496,000
Receivable from officer 341,000 --
Inventories 999,000 842,000
Deferred income taxes, net 274,000 274,000
Prepaid expenses 375,000 159,000
----------- -----------
Total current assets 2,676,000 3,892,000
----------- -----------
Property, buildings and equipment, at cost, less accumulated
depreciation 33,611,000 29,490,000
----------- -----------
Real property and equipment under capitalized leases, at cost, less
accumulated amortization 1,913,000 2,100,000
----------- -----------
Other assets:
Notes receivable, net of current portion 3,494,000 3,491,000
Deposits and other 377,000 344,000
----------- -----------
Total other assets 3,871,000 3,835,000
----------- -----------
Goodwill, less accumulated amortization 4,078,000 4,069,000
Other intangible assets, less accumulated amortization 707,000 773,000
----------- -----------
Total intangible assets 4,785,000 4,842,000
----------- -----------
Total assets $46,856,000 $44,159,000
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY AUGUST 9, JANUARY 25,
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 4,663,000 $ 3,622,000
Payroll and related taxes 1,957,000 1,918,000
Sales and property taxes 1,162,000 869,000
Rent, licenses and other 675,000 705,000
Current maturities of obligations under capital
leases and long-term debt 2,328,000 1,329,000
------------ ------------
Total current liabilities 10,785,000 8,443,000
------------ ------------
Deferred income taxes, net 379,000 379,000
Capitalized lease obligations, net of current
maturities 1,965,000 2,049,000
Long-term debt, net of current maturities 12,725,000 13,925,000
Preferred stock, $.001 par value; authorized
1,500,000 shares; none issued or outstanding -- --
Common stock, $.001 par value; authorized
18,500,000 shares; issued and outstanding
2,950,000 and 2,950,000 shares 3,000 3,000
Additional paid-in capital 16,351,000 16,351,000
Retained earnings 4,797,000 3,199,000
Treasury stock, at cost, 25,591 and 31,000 shares (149,000) (190,000)
------------ ------------
Total stockholders' equity 21,002,000 19,363,000
------------ ------------
Total liabilities and stockholders' equity $ 46,856,000 $ 44,159,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
---------------------------- ----------------------------
AUGUST 9, AUGUST 10, AUGUST 9, AUGUST 10,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues $ 22,836,000 $ 20,751,000 $ 54,371,000 $ 46,249,000
Costs and expenses
Food costs 7,461,000 6,858,000 17,933,000 15,393,000
Labor costs 7,807,000 6,749,000 18,045,000 14,493,000
Occupancy and other expenses 4,494,000 4,194,000 10,727,000 9,244,000
General and administrative expenses 983,000 1,027,000 2,491,000 2,161,000
Depreciation and amortization 848,000 691,000 1,880,000 1,500,000
------------ ------------ ------------ ------------
Total costs and expenses 21,593,000 19,519,000 51,076,000 42,791,000
------------ ------------ ------------ ------------
Income from operations 1,243,000 1,232,000 3,295,000 3,458,000
Interest expense (281,000) (55,000) (652,000) (121,000)
Interest income 3,000 161,000 21,000 473,000
Other Income -- 75,000 -- 154,000
------------ ------------ ------------ ------------
Income before income taxes 965,000 1,413,000 2,664,000 3,964,000
Income tax expense 386,000 565,000 1,066,000 1,585,000
------------ ------------ ------------ ------------
Net income $ 579,000 $ 848,000 $ 1,598,000 $ 2,379,000
============ ============ ============ ============
Net income per common share - basic $ 0.20 $ 0.16 $ 0.54 $ 0.44
============ ============ ============ ============
Weighted average shares outstanding - basic 2,950,000 5,450,000 2,950,000 5,450,000
============ ============ ============ ============
Net income per common share - diluted $ 0.20 $ 0.16 $ 0.54 $ 0.43
============ ============ ============ ============
Weighted average shares outstanding - diluted 2,950,000 5,450,000 2,950,000 5,490,000
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE> 6
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
---------------------------
AUGUST 9, AUGUST 10,
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,598,000 $ 2,379,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,880,000 1,500,000
Amortization of loan cost 50,000 --
Amortization of royalty fee 23,000 222,000
Interest income -- (102,000)
Change in operating assets and liabilities:
Receivables 420,000 (766,000)
Inventories (157,000) (248,000)
Prepaid expenses 34,000 (867,000)
Deposits and other (33,000) (292,000)
Deferred taxes -- 207,000
Accounts payable 1,041,000 804,000
Other accrued liabilities 301,000 (152,000)
----------- ------------
Net cash provided by operating activities 5,157,000 2,685,000
Cash flows from investing activities:
Collections on notes receivable 1,124,000 --
Loans to officer (341,000) --
Issuance of notes receivable -- (2,250,000)
Acquisition of restaurants -- (6,428,000)
Acquisition of property, buildings and equipment (5,806,000) (2,290,000)
----------- ------------
Net cash used in investing activities (5,023,000) (10,968,000)
Cash flows from financing activities:
Payments to extinguish long term debt (2,837,000) (540,000)
Principal payment on capital leases (147,000) (151,000)
Proceeds from line of credit 2,700,000 --
Sale of treasury stock 40,000 --
----------- ------------
Net cash used in financing activities (244,000) (691,000)
----------- ------------
Net decrease in cash and cash equivalents (110,000) (8,974,000)
Cash and cash equivalents at beginning of period 121,000 15,387,000
----------- ------------
Cash and cash equivalents at end of period $ 11,000 $ 6,413,000
=========== ============
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
6
<PAGE> 7
STAR BUFFET, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
------------------------
AUGUST 9, AUGUST 10,
1999 1998
-------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow Information:
Cash paid for interest $109,000 $ 146,000
======== ==========
Cash paid for income taxes $ 32,000 $2,166,000
======== ==========
Non cash investing and financing activities:
Exchange of receivables from Stacey's Buffet, Inc.
for three Stacey's Buffet Restaurants $ -- $1,004,000
Acquisition of BuddyFreddys assets with debt financing $ -- $1,200,000
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements.
7
<PAGE> 8
STAR BUFFET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE (A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts for Star Buffet, Inc., together with its direct and indirect wholly
owned subsidiaries Summit Family Restaurants Inc. ("Summit"), HTB Restaurants,
Inc. ("HTB"), Northstar Buffet, Inc. ("NSBI") and Star Buffet Management, Inc.
("SBMI") (collectively the "Company") and have been prepared in accordance with
generally accepted accounting principles, the instructions to Form 10-Q and
Article 10 of Regulation S-X. These financial statements should be read in
conjunction with the audited consolidated financial statements, and the notes
thereto, included in the Company's Annual Report on Form 10-K for the fiscal
year ended January 25, 1999. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the financial position and results of operations for the interim periods
presented have been reflected herein. Results of operations for such interim
periods are not necessarily indicative of results to be expected for the full
fiscal year or for any future periods. Certain reclassifications have been made
to the fiscal 1999 consolidated financial statements to conform to the fiscal
2000 presentation. The accompanying condensed financial statements include the
results of operations and assets and liabilities directly related to the
Company's operations. Certain estimates, assumptions and allocations were made
in preparing such financial statements.
The operating results for the 12-week period ended August 9, 1999 include
operations for each of the Company's sixteen franchised HomeTown Buffet
restaurants, two Casa Bonita restaurants, six JJ North's Grand Buffet
restaurants, three North's Star Buffet restaurants, nine franchised JB's
Restaurants, two BuddyFreddys restaurants, two Holiday House restaurants and
nine BuddyFreddys Country Buffet restaurants. The operating results for the
12-week period ended August 9, 1999 also include twelve weeks for one closed
North's Star Buffet restaurants, nine weeks of operations for one closed North's
Star Buffet restaurants which was converted to a JB's Restaurant for the last
three weeks of the quarter, ten weeks of operations of a Holiday House that was
converted to a BuddyFreddys Country Buffet, and eight, six and one week of
operations of three additional BuddyFreddys Country Buffet, respectively. The
operating results for the 12-week period ended August 10, 1998 include 12 weeks
of operations for each of the Company's 16 franchised HomeTown Buffet
restaurants, two Casa Bonita restaurants, seven JJ North's Grand Buffet
restaurants, nine JB's Restaurants, three North Star Buffet restaurants, three
Stacey's Buffet restaurants, two BuddyFreddys restaurants and two Maggie's
Buffet restaurants. In addition, the Company opened one North's Star Buffet
restaurant on August 10, 1998 and has one Stacey's Buffet restaurant closed for
remodeling.
The Company utilizes a 52/53 week fiscal year which ends on the last Monday in
January. The first quarter of each year contains 16 weeks while the other three
quarters each contain 12 weeks.
NOTE (B) PREVIOUSLY ANNOUNCED JOINT DEVELOPMENT
The Company, in December 1998, announced with DenAmerica, Inc. to convert
certain existing Black-eyed Pea restaurants in Florida to BuddyFreddys
restaurants. The first BuddyFreddys restaurant jointly developed with DenAmerica
opened in April 1999. Two more conversions opened in June and July 1999.
8
<PAGE> 9
NOTE (C) SUBSEQUENT EVENT
HTB Restaurants, Inc. ("HTB") holds 16 franchises for HomeTown Buffet
restaurants. The franchisor, HomeTown Buffet Restaurants, Inc. ("HomeTown"), has
asserted that the Company breached its franchise agreements by using proprietary
information of the franchisor to open the Company's North's Star Buffet
restaurants and issued a notice of termination of the 16 franchise agreements on
July 21, 1998. The Company denied any breach and demanded arbitration to contest
the Notice of Termination. In a sixteen page Award, the arbitrator ruled that
HomeTown was not entitled to terminate the franchise agreements. The arbitrator
concluded that the claimed bases for termination set forth in the July 1998
Notice were either not proved by HomeTown or were not a violation of the
franchise agreements. The arbitrator, however, found that the franchise
agreements placed strict requirements upon HTB to protect HomeTown's proprietary
information and to prevent its disclosure, and that there was evidence that
HomeTown information had been disclosed. Accordingly, the arbitrator awarded
HomeTown damages in the amount of $250,000 and directed HTB to pay all
administrative fees and expenses of the American Arbitration Association
incurred by both parties, as well as all fees and expenses of the Arbitrator.
The Award enjoins HTB and any of its officers, agents, or employees from using
HomeTown information in any other similar restaurant business as authorized
under the franchise agreements. The Award is a full settlement of all claims
submitted to the arbitration.
NOTE (D) RELATED PARTY TRANSACTION
In connection with the Company's employment contract with Mr. Robert E.
Wheaton, the Company's President and Chief Executive Officer, the Company has
agreed to provide Mr. Wheaton with certain loans solely for the purchase of the
Company's common stock. The loans are full recourse and bear interest at the
prevailing rate set forth in the Company's credit facility with BankBoston. The
current rate is approximately seven percent. At the end of the second quarter,
the loans totaled $341,000.
NOTE (E) CONTINGENCIES
On November 12, 1998, North's Restaurants, Inc. ("North's") filed a Demand for
Arbitration against the Company with the American Arbitration Association,
Irvine, California (District No. 949-251-9840), alleging breach of contract in
connection with the Company's failure to perform under a Business Services
Agreement between North's and the Company dated July 24, 1997. On June 22, 1999,
the parties agreed to dismiss the Arbitration Proceeding without prejudice since
the issues related to the Business Service Agreement are being litigated in the
Utah action described below.
On November 25, 1998, the Company filed an action against North's Restaurants,
Inc. ("North's") in the United States District Court, District of Utah, Case No.
2-98-CV-893, seeking damages for breach of a promissory note and an Amended and
Restated Credit Agreement (collectively, the "Credit Agreements") in the amount
of $3,570,935. On December 31, 1998, North's filed an answer to the Company's
Complaint, denying generally the allegations, and filed counterclaims against
the Company alleging (i) the Company fraudulently induced North's to enter into
various agreements with the Company relating to the Company's acquisition of
seven JJ North's Grand Buffet Restaurants and an option to acquire nine
additional restaurants operated by North's and (ii) the Company has breached the
Business Services Agreement. The Company plans to pursue vigorously its claims
against North's and to vigorously defend the counterclaims asserted by North's.
The litigation is continuing and is not yet scheduled for trial.
The Company is from time to time the subject of complaints or litigation from
customers alleging injury on properties operated by the Company, illness or
other food quality, health or operational concerns. Adverse publicity resulting
from such allegations may materially adversely affect the Company and its
9
<PAGE> 10
restaurants, regardless of whether such allegations are valid or whether the
Company is liable. The Company also is the subject of complaints or allegations
from employees from time to time. The Company believes that the lawsuits, claims
and other legal matters to which it has become subject in the course of its
business are not material to the Company's business, financial condition or
results of operations, but an existing or future lawsuit or claim could result
in an adverse decision against the Company that could have a material adverse
effect on the Company's business, financial condition and results of operations.
10
<PAGE> 11
STAR BUFFET, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following Management's Discussion and Analysis should be read in conjunction
with the unaudited consolidated financial statements, and the notes thereto,
presented elsewhere in this Report. The addition of restaurants in Florida are
the principal reasons for the differences when comparing results of operations
for the 12-week period ended August 9, 1999 with the results of operations for
the 12-week period ended August 10, 1998. Comparability of future periods may
also from time to time be affected by the implementation of the Company's
acquisition and strategic alliance strategies.
Consolidated net income for the 12-week period ended August 9, 1999 decreased
$269,000 or 31.7% to $579,000 or $0.20 per share on a diluted basis as compared
with net income of $848,000 for the comparable prior year period. Consolidated
net income for the 28-week period ended August 9, 1999 decreased $781,000 or
32.8% to $1,598,000 or $0.54 per share on a diluted basis as compared with net
income of $2,379,000 for the comparable prior year period. Net income was
impacted by higher interest costs from borrowings associated with increased
capital expenditures and the Company's repurchase of 2,500,000 shares of common
stock in the third and fourth quarters of last year.
This Quarterly Report on Form 10-Q contains forward looking statements, which
are subject to known and unknown risks, uncertainties and other factors which
may cause the actual results, performance, or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; success
of integrating newly acquired under-performing or unprofitable restaurants; the
impact of competitive products and pricing; success of operating initiatives;
advertising and promotional efforts; adverse publicity; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; changes in prevailing interest rates and the availability
of financing; food, labor, and employee benefits costs; changes in, or the
failure to comply with, government regulations; weather conditions; construction
schedules; implementation of the Company's acquisition and strategic alliance
strategy; the effect of the Company's accounting polices and other risks
detailed in the Company's Form 10-K, for the fiscal year ended January 25, 1999,
and other filings with the Securities and Exchange Commission.
COMPONENTS OF INCOME FROM OPERATIONS
Total revenues include a combination of food and beverage sales and are net of
applicable state and city sales taxes.
Food costs primarily consist of the costs of food and beverage items. Various
factors beyond the Company's control, including adverse weather and natural
disasters, may affect food costs. Accordingly, the Company may incur periodic
fluctuations in food costs. Generally, these temporary increases are absorbed by
the Company and not passed on to customers; however, management may adjust menu
prices to compensate for increased costs of a more permanent nature.
Labor costs include restaurant management salaries, bonuses, hourly wages for
unit level employees, various health, life and dental insurance programs,
vacations and sick pay and payroll taxes.
11
<PAGE> 12
Occupancy and other expenses are primarily fixed in nature and generally do not
vary with restaurant sales volume. Rent, insurance, property taxes, utilities,
maintenance and advertising account for the major expenditures in this category.
General and administrative expenses include all corporate and administrative
functions that serve to support the existing restaurant base and provide the
infrastructure for future growth. Management, supervisory and staff salaries,
employee benefits, data processing, training and office supplies are the major
items of expense in this category.
Other income represents management fee income resulting from the Company's
management agreement related to one JJ North's Grand Buffet restaurant which was
converted to a Company unit on January 12, 1999.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations as a
percentage of total revenues for the 12 and 28 weeks ended August 9, 1999 and
August 10, 1998.
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------------- -------------------------
AUGUST 9, AUGUST 10, AUGUST 9, AUGUST 10,
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Costs and expenses
Food costs 32.7 33.1 33.0 33.3
Labor costs 34.2 32.5 33.2 31.3
Occupancy and other expenses 19.7 20.2 19.7 20.0
General and administrative
expenses 4.3 5.0 4.6 4.7
Depreciation and amortization 3.7 3.3 3.4 3.2
------ ------ ------ ------
Total costs and expenses 94.6 94.1 93.9 92.5
------ ------ ------ ------
Income from operations 5.4 5.9 6.1 7.5
Interest expense (1.2) (0.3) (1.2) (0.2)
Interest income -- 0.8 -- 1.0
Other Income -- 0.4 -- 0.3
------ ------ ------ ------
Income before income taxes 4.2 6.8 4.9 8.6
Income tax expense (1.7) (2.7) (2.0) (3.5)
------ ------ ------ ------
Net income 2.5% 4.1% 2.9% 5.1%
====== ====== ====== ======
Effective income tax rate 40.0% 40.0% 40.0% 40.0%
====== ====== ====== ======
</TABLE>
Total revenues increased $2,085,000 or 10.0% from $20.8 million in the 12 weeks
ended August 10, 1998 to $22.8 million in the 12 weeks ended August 9, 1999. The
increase in revenues reflects additional restaurants in operation in the
quarter, primarily in the Florida division. Total revenues increased $8.2
million or 17.6% from $46.2 million in the 28 weeks ended August 10, 1998 to
$54.4 million in the 28 weeks ended August 9, 1999. The increase in revenues
reflects additional restaurants in operation in the quarter, primarily in the
Florida division.
Food costs as a percentage of total revenues decreased from 33.1% during the
12-week period ended August 10, 1998 to 32.7% during the 12 weeks ended August
9, 1999, and from 33.3% during the 28-week period ended August 10, 1998 to 33.0%
during the 28 weeks ended August 9, 1999. The decrease as a percentage of total
revenues was primarily attributable to lower food costs in the converted Florida
Buffets Division stores.
13
<PAGE> 14
Labor costs as a percentage of total revenues increased from 32.5% during the
12-week period ended August 10, 1998 to 34.2% during the 12-week period ended
August 9, 1999, and from 31.3% during the 28-week period ended August 10, 1998
to 33.2% during the 28 weeks ended August 9, 1999. The increase as a percentage
of total revenues was primarily attributable to increases in benefits and
workers compensation from the prior year.
Occupancy and other expenses as a percentage of total revenues decreased from
20.2% during the 12-week period ended August 10, 1998 to 19.7% during the
12-week period ended August 9, 1999, and from 20.0% during the 28-week period
ended August 10, 1998 to 19.7% during the 28-week period ended August 9, 1999.
The decrease as a percentage of total revenues primarily reflects increased
revenues in the Florida Buffets Division restaurants.
General and administrative costs as a percentage of total revenues decreased
from 5.0% during the 12-week period ended August 10, 1998 to 4.3% during the
12-week period ended August 9, 1999, and from 4.7% during the 28-week period
ended August 10, 1998 to 4.6% during the 28-week period ended August 9, 1999.
The decrease as a percentage of total revenues was primarily attributable to
increased revenues in the Florida Buffets Division restaurants.
Interest expense as a percentage of total revenues increased from 0.3% during
the 12-week period ended August 10, 1998 to 1.2% during the 12-week period ended
August 9, 1999, and from 0.2% during the 28-week period ended August 10, 1998 to
1.2% during the 28-week period ended August 9, 1999. The increase as a
percentage of total revenues was primarily attributable to the repurchase of the
Company's common stock and conversions of restaurants.
Interest income of $3,000 and $21,000 for the 12 and 28-week periods ended
August 9, 1999, respectively, was generated by the Company's cash and
outstanding notes receivable balances during the period. Management has
suspended the interest accrual on the notes receivable from North's Restaurants,
Inc. ("North's") pending the resolution of the Company's dispute with North's.
Interest income of $161,000 and $473,000 for the 12 and 28-week periods ended
August 10, 1998, respectively, was generated by interest earned on the Company's
cash and cash equivalents and outstanding notes receivable balances during the
period.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment and construction
could affect the Company's operations. Many of the Company's employees are paid
hourly rates related to the federal and state minimum wage laws. Recent
legislation increasing the federal minimum wage has resulted in higher labor
costs to the Company. In addition, the cost of food commodities utilized by the
Company are subject to market supply and demand pressures. Shifts in these costs
may have a significant impact on the Company's food costs. The Company
anticipates that increases in these costs can be offset through pricing and
other cost control efforts; however, there is no assurance that the Company
would be able to pass such costs on to its guests or if it were able to do so,
it could do so in a short period of time.
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<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company historically financed operations through a combination of cash on
hand, cash provided from operations and, prior to the Company's initial public
offering in September 1997, borrowings available to its predecessor under bank
lines of credit. As of August 9, 1999, the Company had $11,000 in cash. Cash and
cash equivalents decreased by $110,000 during the 28 weeks ended August 9, 1999.
Total cash provided by operations was approximately $5.2 million. A note
receivable paid in full provided cash of approximately $1.1 million. The Company
used approximately $5.8 million on capital improvements and approximately
$244,000 to extinguish long term debt.
The Company opened one BuddyFreddys Country Buffet restaurant, converted one
Holiday House Restaurant to a BuddyFreddys Country Buffet and converted two
joint development restaurants to BuddyFreddys restaurants during the second
quarter of fiscal 2000. In addition, one closed North's Star Buffet restaurant
was re-opened as a JB's Restaurant.
The Company intends to expand its operations through the opening of new
restaurants and the acquisition of regional buffet chains. In addition, the
Company may expand through the purchase of existing restaurant sites which would
be converted to one of the Company's existing restaurant concepts. In many
instances, management believes that existing restaurant locations can be
acquired and converted to the Company's prototype at a lower cost than new unit
openings. Management estimates the cost of acquiring and converting a property
to one of the existing concepts to be approximately $150,000 to $650,000. These
costs consist primarily of exterior and interior modifications, signage, new
tables, chairs and food bars and the addition of certain kitchen and food
service equipment. There can be no assurance that the Company will be able to
acquire additional restaurant chains or locations or, if acquired, that these
restaurants will have a positive contribution to the Company's results of
operations.
On October 23, 1998, the Company entered into a $20 million syndicated bank
financing agreement led by BankBoston, N.A. The credit facility consists of a
$13 million, 5-year term loan (the "Term Loan Facility") and a $7 million,
5-year revolving credit facility (the "Revolving Credit Facility"). The Term
Loan Facility refinanced existing indebtedness and provided capital for the
repurchase of common stock and acquisitions. The Term Loan Facility balance was
$11.9 million as of September 17, 1999. Principal payments under the Term Loan
Facility are due in quarterly installments, beginning in November 1999 and
continue until the final maturity in October 2003. Borrowings under the
Revolving Credit Facility will be used for the Company's new unit development
and working capital needs. All outstanding amounts under the Revolving Credit
Facility will become due in October 2003. The Revolving Credit Facility balance
was $4.9 million on September 17, 1999.
The Company believes that available cash, cash flow from operations and amounts
available under the Term Loan Facility and Revolving Credit Facility will be
sufficient to satisfy its working capital and capital expenditure requirements
for the foreseeable future. If the Company requires additional funds to support
its working capital requirements or for other purposes, including acquisitions,
it may seek to raise such additional funds through public or private equity
and/or debt financing or from other sources. There can be no assurance, however,
that changes in the Company's operating plans, the unavailability of a credit
facility, the acceleration of the Company's expansion plans, lower than
anticipated revenues, increased expenses, potential acquisitions, or other
events will not cause the Company to seek additional financing sooner than
anticipated. There can be no assurance that additional financing will be
available on acceptable terms or at all.
15
<PAGE> 16
YEAR 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The "Year 2000" problem stems from computer
applications that were written using two digits rather than four digits to
define the applicable year. As a result, these applications may recognize "00"
as "1900" rather than "2000."
The Company has investigated the impact of the Year 2000 problem on its
business, including the Company's operational, information and financial
systems. Based on this investigation, the Company does not expect the Year 2000
problem, including the cost of making the Company's computerized information
systems Year 2000 compliant, to have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods. The
Company has a few remaining non-compliant restaurants and home office personal
computers that will be upgraded in the next 3 months.
The Company has also initiated communications with significant suppliers and
vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third parties
to remediate their Year 2000 problems. While the Company has not been informed
of any material risks associated with the Year 2000 problem on these entities,
there can be no assurance that the computerized information systems of these
third parties will be Year 2000 compliant on a timely basis. The inability of
these third parties to remediate their Year 2000 problems could have a material
adverse impact on the Company.
To date, the Company has expensed incremental costs of approximately $107,000 to
assess and remediate potential Year 2000 problems. The total remaining
incremental cost is estimated to be $93,000. The Company is expensing as
incurred all costs related to the assessment and remediation of the Year 2000
issue. These costs are being funded through operating cash flows.
SEGMENT AND RELATED REPORTING
The Company has five reportable operating segments: HomeTown Buffet, Casa
Bonita, North's Star, Florida Buffets Division and JB's Restaurants. The
Company's reportable segments are based on the brand similarities and geographic
location.
The HomeTown Buffet segment includes the Company's 16 franchised HomeTown Buffet
restaurants. The Casa Bonita segment includes two Casa Bonita restaurants. The
North's Star segment includes six JJ North's Grand Buffet restaurants and four
North's Star Buffet Restaurants. The Florida Buffets Division includes four
BuddyFreddys restaurants, eleven BuddyFreddys Country Buffet restaurants and two
Holiday House restaurants. The JB's Restaurants segment includes the Company's
ten franchised JB's Restaurants.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on income before income taxes.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The other assets presented in the consolidated
balance sheet and not in the reportable
16
<PAGE> 17
segments relate to the Company as a whole, and not individual segments. Also
certain incomes and expenses in the consolidated statements of income are not
included in the reportable segments.
<TABLE>
<CAPTION>
28 WEEKS ENDED HOMETOWN CASA NORTH'S FLORIDA
AUGUST 9, 1999 BUFFET BONITA STAR BUFFET JB'S OTHER TOTAL
-------------- -------- ------ ------- ------- ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $23,344 $6,975 $6,347 $ 12,161 $5,544 $ -- $54,371
Interest income -- -- 6 -- -- 15 21
Interest expense 86 -- 4 11 5 546 652
Deprecation & amortization 985 82 236 454 111 12 1,880
Income (loss) before income taxes 2,684 1,495 36 (85) 373 (1,839) 2,664
Total assets 21,298 1,518 6,776 12,622 2,218 2,424 46,856
28 WEEKS ENDED
AUGUST 10, 1998
---------------
Revenues $22,569 $7,398 $5,724 $ 5,145 $5,413 $ -- $46,249
Interest income -- -- 169 26 -- 277 472
Interest expense 96 -- -- 19 6 -- 121
Deprecation & amortization 943 67 259 102 129 -- 1,500
Income (loss) before income taxes 2,527 1,671 467 (607) 351 (446) 3,963
Total assets 20,078 1,291 4,262 2,185 3,201 13,759 44,776
</TABLE>
17
<PAGE> 18
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 12, 1998, North's Restaurants, Inc. ("North's") filed a Demand for
Arbitration against the Company with the American Arbitration Association,
Irvine, California (District No. 949-251-9840), alleging breach of contract in
connection with the Company's failure to perform under a Business Services
Agreement between North's and the Company dated July 24, 1997. On June 22, 1999,
the parties agreed to dismiss the Arbitration Proceeding without prejudice since
the issues related to the Business Service Agreement are being litigated in the
Utah action described below.
On November 25, 1998, the Company filed an action against North's Restaurants,
Inc. ("North's") in the United States District Court, District of Utah, Case No.
2-98-CV-893, seeking damages for breach of a promissory note and an Amended and
Restated Credit Agreement (collectively, the "Credit Agreements") in the amount
of $3,570,935. On December 31, 1998, North's filed an answer to the Company's
Complaint, denying generally the allegations, and filed counterclaims against
the Company alleging (i) the Company fraudulently induced North's to enter into
various agreements with the Company relating to the Company's acquisition of
seven JJ North's Grand Buffet Restaurants and an option to acquire nine
additional restaurants operated by North's and (ii) the Company has breached the
Business Services Agreement. The Company plans to pursue vigorously its claims
against North's and to vigorously defend the counterclaims asserted by North's.
The litigation is continuing and is not yet scheduled for trial.
HTB Restaurants, Inc. ("HTB") holds 16 franchises for HomeTown Buffet
restaurants. The franchisor, HomeTown Buffet Restaurants, Inc. ("HomeTown"), has
asserted that the Company breached its franchise agreements by using proprietary
information of the franchisor to open the Company's North's Star Buffet
restaurants and issued a notice of termination of the 16 franchise agreements on
July 21, 1998. The Company denied any breach and demanded arbitration to contest
the Notice of Termination. In a sixteen page Award, the arbitrator ruled that
HomeTown was not entitled to terminate the franchise agreements. The arbitrator
concluded that the claimed bases for termination set forth in the July 1998
Notice were either not proved by HomeTown or were not a violation of the
franchise agreements. The arbitrator, however, found that the franchise
agreements placed strict requirements upon HTB to protect HomeTown's proprietary
information and to prevent its disclosure, and that there was evidence that
HomeTown information had been disclosed. Accordingly, the arbitrator awarded
HomeTown damages in the amount of $250,000 and directed HTB to pay all
administrative fees and expenses of the American Arbitration Association
incurred by both parties, as well as all fees and expenses of the Arbitrator.
The Award enjoins HTB and any of its officers, agents, or employees from using
HomeTown information in any other similar restaurant business as authorized
under the franchise agreements. The Award is a full settlement of all claims
submitted to the arbitration.
The Company is from time to time the subject of complaints or litigation from
customers alleging injury on properties operated by the Company, illness or
other food quality, health or operational concerns. Adverse publicity resulting
from such allegations may materially adversely affect the Company and its
restaurants, regardless of whether such allegations are valid or whether the
Company is liable. The Company also is the subject of complaints or allegations
from employees from time to time. The Company believes that the lawsuits, claims
and other legal matters to which it has become subject in the course of its
business are not material to the Company's business, financial condition or
results of operations, but an existing or future lawsuit or claim could result
in an adverse decision against the Company that could have a material adverse
effect on the Company's business, financial condition and results of operations.
18
<PAGE> 19
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on June 28, 1999. Of the 2,950,000
shares of the Company's common stock issued and outstanding and entitled to vote
at the meeting, there were present at the meeting, in person or by proxy, the
holders of 2,759,320 common shares, representing 93.5% of the total number of
shares entitled to vote at the meeting. This percentage represents a quorum. The
following matters were voted upon at the stockholders' meeting:
1. Each of the five nominees to the Board of Directors was elected to
serve a one-year term expiring at the annual meeting of stockholders to be held
in 2000 or until their successors are elected and qualified:
<TABLE>
<CAPTION>
Name Number of Votes Cast
---- ----------------------------------
For Authority Withheld
--------- ------------------
<S> <C> <C>
Robert E. Wheaton 2,756,520 2,800
Jack M. Lloyd 2,756,440 2,880
Thomas G. Schadt 2,456,440 2,880
Phillip "Buddy" Johnson 2,756,440 2,880
Craig B. Wheaton 2,756,140 3,180
</TABLE>
2. A proposal to amend the Certificate of Incorporation to require the
approval of holders of 66-2/3% of the voting power of the then outstanding
shares of any class or series of capital stock of the Company entitled to vote,
voting together as a single class and/or the approval of 66-2/3% of the
directors of the Company for certain corporate transactions was defeated by the
following vote:
<TABLE>
<CAPTION>
Votes Cast Number of Shares
---------- ----------------
<S> <C>
For 1,259,531
Against 970,630
Abstain 2,100
Broker Non-Votes 527,059
</TABLE>
3. The ratification of the selection of KPMG LLP as independent public
accountants of the Company for the current fiscal year was approved by the
following vote:
<TABLE>
<CAPTION>
Votes Cast Number of Shares
---------- ----------------
<S> <C>
For 2,759,320
Against 0
Abstain 0
Broker Non-Votes 0
</TABLE>
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are attached to this report:
Exhibit Description
Number of Exhibit
------- -----------
11 Calculation of Earnings per Share
27.1 Financial Data Schedule (EDGAR version only)
The Company did not file any current reports on Form 8-K during the
twelve weeks ended August 9, 1999.
There were no other items to be reported under Part II of this report.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR BUFFET, INC. AND SUBSIDIARIES
September 23, 1999 By: /s/ Robert E. Wheaton
-------------------------------------
Robert E. Wheaton
President and Chief Executive Officer
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Description
Number of Exhibit
------- -----------
11 Calculation of Earnings per Share
27.1 Financial Data Schedule (EDGAR version only)
<PAGE> 1
EXHIBIT 11
STAR BUFFET, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS
PER SHARE
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-EIGHT WEEKS ENDED
------------------------ ------------------------
AUGUST 9, AUGUST 10, AUGUST 9, AUGUST 10,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net Income $ 579,000 $ 848,000 $1,598,000 $2,379,000
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding during the period 2,950,000 5,450,000 2,950,000 5,450,000
---------- ---------- ---------- ----------
Basic Earnings per Share $ 0.20 $ 0.16 $ 0.54 $ 0.44
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE
Net Income $ 579,000 $ 848,000 $1,598,000 $2,379,000
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding during the period 2,950,000 5,450,000 2,950,000 5,450,000
---------- ---------- ---------- ----------
Incremental common shares
attributable to outstanding stock options -- -- -- 40,000
---------- ---------- ---------- ----------
2,950,000 5,450,000 2,950,000 5,490,000
Diluted Earnings per Share $ 0.20 $ 0.16 $ 0.54 $ 0.43
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's balance sheet and statements of operations as of and for the twelve
week period ended August 9, 1999 and is qualified in its entirety by reference
to such financial statements, including the notes thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> JAN-26-1999
<PERIOD-END> AUG-09-1999
<CASH> 11,000
<SECURITIES> 0
<RECEIVABLES> 676,000
<ALLOWANCES> 0
<INVENTORY> 999,000
<CURRENT-ASSETS> 2,676,000
<PP&E> 46,000,000
<DEPRECIATION> (10,476,000)
<TOTAL-ASSETS> 46,856,000
<CURRENT-LIABILITIES> 10,785,000
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 20,999,000
<TOTAL-LIABILITY-AND-EQUITY> 46,856,000
<SALES> 22,836,000
<TOTAL-REVENUES> 22,836,000
<CGS> 20,610,000
<TOTAL-COSTS> 21,593,000
<OTHER-EXPENSES> (3,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 281,000
<INCOME-PRETAX> 965,000
<INCOME-TAX> 386,000
<INCOME-CONTINUING> 579,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 579,000
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
